Section 269 of the Income Tax Act deals with curbing the use of black money in India. Business owners and individuals need to constantly update themselves regarding such taxation laws to maintain compliance and to avoid penalties, fines, and legal action.
One of the most significant threats that our economy faces is the circulation of black money within the market. Many taxpayers use cash-only transactions to evade paying their tax liabilities and their responsibility toward the economy. A large number of cash transactions lead to a monumental loss of revenue for the government via payment of taxes. Additionally, cash transactions are hard to track, allowing or facilitating the circulation of black money in the economy.
Hence, the Indian government introduced Section 269ST to the Income Tax Act to put an end to such illegal cash transactions. The law came into effect in April 2017 and helped curb the widespread usage of black money within the market. Here’s a look at everything you need to know about Section 269ST, and how it helps our economy.
Latest Update on Section 269ST
There was some confusion about using cash to repay housing loans after the introduction of Section 269ST. This section restricts cash transactions above ₹2 lakh.
The good news for borrowers is that the Income Tax Department (ITD) has clarified the rule. Here’s what you need to know:
- Focus on Each Instalment: The ₹2 lakh limit applies to each individual loan instalment, not the total loan amount.
- Cash for Smaller Instalments: If a single instalment is less than ₹2 lakh, you can repay it in cash.
- No Need to Add Up Instalments: The total amount paid across all instalments throughout the loan repayment period doesn’t affect this rule.
In simpler terms: You can use cash for your regular monthly payments as long as each instalment stays under the ₹2 lakh limit.
What Is Section 269ST of the Income Tax Act?
Before the introduction of Section 269ST, Sections 269SS, and 269T served as mechanisms to curb the usage of black money within the Indian market by restricting cash transactions. However, these were not as successful as the government hoped they would be in the long run. Hence, the government introduced Section 269ST which restricts cash transactions to below ₹2 lakhs in a single day for any individual. Hence, no individual or single person can accept a cash amount above or equal to ₹2 lakhs in one day.
As a single cash transaction, no person can pay an amount exceeding the sum of ₹2 lakhs. Individuals cannot split the sum into smaller part payments, and the concerned party cannot accept such payments as well. Additionally, payments received from various sources related to a single event or occasion, in part or as smaller values, cannot exceed ₹2 lakhs in one day. The amount exceeding this cash limit may be paid through cheques, drafts, or by employing an electronic clearing system through a bank account.
Before Section 269ST
Prior to Section 269ST, managing cash flow for loans and deposits involved different rules. Here’s a breakdown of the old system:
- Lower Cash Limit: The previous limit for cash transactions was ₹19,999. Any amount exceeding this had to be paid through methods like cheques or electronic transfers.
- Curbing Black Money: This rule aimed to limit the circulation of “black money,” or undisclosed income, by discouraging large cash transactions.
- Mixed Results: While the intention was good, the ₹19,999 limit proved less effective than anticipated.
- Court-Based Penalties: The courts held the power to penalise those who violated these rules. However, genuine transactions with proper documentation could avoid penalties.
In short: Before Section 269ST, the cash transaction limit was lower, but enforcement relied more on court discretion and proof of legitimate transactions.
How Does This Impact Loan Repayment?
However, the introduction of this section created confusion regarding the nature of threshold limits for financial transactions. As a result, various non-banking financial corporations sent several representations to receive more clarity regarding whether the limit applies to only one loan installment or for the entire repayment.
The Income Tax Department clarified that when it comes to loan repayments to NBFCs/HFCs, one installment of the repayment is considered as a single transaction. Therefore, if the single installment amount falls below ₹2 lakhs, individuals can pay the same in cash.
Use the Income tax calculator on Vakilsearch to quickly calculate your taxes and submit your ITR.
Exceptions for Section 269ST of the Income Tax Act
The provisions of Section 269ST do not apply to the following individuals or entities.
- Government
- Banking companies
- Co-operative banks
- Post office organizations
- Transactions that fall under the purview of Section 269SS of the Income Tax Act
Notification 28/2017, specified in the official gazette by the central government mentions that these provisions do not apply on receipts from any post office, savings bank, or cooperative bank. Additionally, notification 57/2017 details other conditions wherein the provisions of Section 269ST will not be applicable. And those are as follows.
- Cash received by a business correspondent on behalf of a banking company or cooperative bank, as per RBI guidelines
- Additionally, cash transactions by an ATM operator from retail outlet sources on behalf of a banking company or cooperative bank, as per the Payment and Settlement Systems Act, 2007
- Cash received from an agent by the issuer of a pre-paid payment instrument as per the Payment and Settlement Systems Act, 2007
- Transactions by a company or financial institution that issues credit cards against bills for which payments are due in respect of a single or multiple credit cards
- Cash payments are excluded from the total income under clause 17A, Section 10 of the Income Tax.
LLP ITR filing is necessary to comply with the law, avoid penalties, and report the LLP’s income, profits, and losses to the government.
What Happens When Individuals Do Not Comply with These Provisions?
The various penalties implemented in case of infringement of these provisions are as follows:
- If an individual receives any sum that violates the provision of the Act, they are liable to pay as a penalty, the amount equal to the number of receipts
- In case the individual provides a valid, sufficient and good reason for producing such receipts, they will not have to pay any penalty
- All such penalties come under Section 271DA and come under the jurisdiction of the Joint commissioner. However, the sum of the penalty imposed will always be 100% of such receipt in violation of the Act
What Are the Implications of Section 269ST of the Income Tax Act?
Capital gains tax India government introduced these provisions to keep a check on the circulation of black money within the market. The introduction of these rules will also go a long way to promoting digital payments. Which are a more efficient and trackable method of payment. Individuals must keep the following things in mind to prevent violating or infringing this Act.
- Verify all transactions made
- Match all the payments made with transaction details
- Maintain records regarding the date of each payment and transaction
- Keep a record of the payment details made against the bills and verify the date of the debt
- Maintain a record of the payee details and the bills against which those payments were made
Section 269ST of Income Tax Act With Examples
Section 269ST of the Income Tax Act addresses the prohibition of large cash transactions to promote transparency and curb black money. It stipulates that no person should receive ₹2,00,000 or more in cash from any individual in a single day, for a single transaction, or for transactions related to one event or occasion. There are specific exceptions to this rule, such as payments made to the Government, banking companies, or post offices. Violations of Section 269ST can lead to penalties under Section 271DA, which may amount to the total cash received in contravention of the section. This regulation is aimed at encouraging digital transactions and ensuring greater financial transparency. If someone sells goods worth ₹4,50,000 through three different bills of ₹1,50,000 each to the same person and accepts cash on the same day at different times, it will violate Section 269ST(a).
Update on Section 269ST
According to Section 269ST of the Income Tax Act, 1961 receiving ₹2 lakh or more in cash is prohibited: whether received in aggregate from a person in a day, in relation to a single transaction, or in connection with transactions tied to a single event or occasion from a person.
Cash Transaction Limit Under Income Tax
Under Section 269ST of the Income Tax Act, receiving ₹2 lakh or more in cash is prohibited under the following circumstances:
- Cumulatively from one person in a day,
- For a single transaction,
- For transactions related to a single event or occasion from one person.
Exceptions to this rule include receipt via account payee cheque/draft, electronic clearing system, or from government bodies, banks, post offices, and specified entities. Violating Section 269ST incurs a penalty equivalent to the amount received in cash.
Cash Withdrawal Limits and TDS
Regarding cash withdrawals, Section 194N of the Income Tax Act stipulates the following limits and TDS rates:
- If total cash withdrawals exceed ₹1 crore in a financial year, a 2% TDS rate applies.
- Individuals who have not filed income tax returns for the past three years face a 2% TDS rate on withdrawals exceeding ₹20 lakh.
How Individuals Can Violate these Laws?
Let us now take a look at an example that highlights how individuals can violate these laws. Imagine you sell something worth ₹5 lakhs to your friend and accept a cash payment amounting to ₹2.5 lakhs on the same day against the bill. Doing so is a clear violation of Section 269ST, and the government can impose a penalty on you under Section 80rrb of Income Tax act
Against the same bill of ₹5 lakh, if you accept a cash payment amounting to ₹2 lakh, it also results in a violation of the act. Additionally, if for the same amount and bill issued, if you accept the payment in parts from your friend or their relatives, amounting to ₹2 lakhs or more on the same day, that too violates the Income Tax return Act.
However, if the court feels that the involved parties have provided a valid reason for such payments, and they can prove the genuineness of the transactions, fines may not be imposed. Here is a quick look at a few cases of reported violations, wherein the concerned courts dismissed the when to file ITR 2
- Bombay High Court in CIT vs. Triumph International Finance
- ITAT Pune in case of Muslim Urban co-op credit society ltd vs. Income Tax Department
- Gauhati High court in case of Bhagwati Prasad Bajoriya 183 CTR 484
How We Can Help?
As you can see, the introduction of Section 9ST will help drastically reduce the amount of black money circulating within our economy. Individuals need to be aware of such laws and regulations to ensure they stay compliant always. In case you have any queries regarding your tax liabilities or payment of tax dues: https://www.incometax.gov.in/iec/foportal/, feel free to reach out to us at any time. Vakilsearch provides various tax-related services including the filing of Income Tax Returns and completion of Tan registration. Schedule an appointment with one of our legal representatives and stop worrying about the upcoming tax season!
Frequently Asked Questions
What is the difference between 269SS and 269ST?
Section 269T and Section 269SS of the Income Tax Act,1961 are designed to regulate the acceptance and repayment of loans and deposits, ensuring adherence to tax compliance. Section 269SS governs the acceptance of loans and deposits, while Section 269T addresses the repayment of these loans. These provisions aim to maintain transparency and prevent tax evasion in financial transactions involving loans and deposits.
What is the limit for cash receipts?
Limits cash receipts for loans, deposits, and specified advances to ₹20,000 or more, with exceptions. Limits general cash receipts to ₹2 lakh or more in aggregate from a person in a day, for a single transaction, or within an event.
Is it illegal to make cash payments?
While not illegal in general, large cash payments can attract scrutiny under income tax laws. Transactions exceeding prescribed limits may necessitate reporting or face penalties. Opting for digital or cheque payments is encouraged for transparency and compliance with regulations.
What is the exemption under section 269ST?
Payments received via account payee cheques/drafts or electronic clearing system (ECS). Cash received from government, banks, post offices, and specified entities as per provisions in the Income Tax Act. These exemptions promote digital transactions and facilitate legitimate financial activities.
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